For years, gig economy companies grew at a breakneck pace, wracking up losses in hopes the profits would someday pour in.
But now, those companies are emphasizing profitability over growth says Michael Morton, senior research analyst for internet stocks at MoffettNathanson.
“These companies are maturing. Not to where they don’t have growth in their future, but maturing beyond the growth at all costs and to now showing profitability growth for shareholders,” Morton recently told Yahoo Finance. (See video above)
In the last decade, gig economy companies have boomed. For instance, Uber (Uber) recently announced $116 billion in gross bookings. That’s compared to the $19.23 billion the company revealed the year it went public.
“This was a pace where you’re growing as fast as you possibly can and hiring people as fast as humanly possible, and at some point when the growth rate starts to decelerate, you see an increased focus on profitability,” Morton said. “The market was rewarding companies like this for a really long time, especially the private markets, to just grow. Don’t worry about profits.”
Morton says there are multiple signs that gig economy companies are pivoting towards profitability. In particular, he pointed to DoorDash (Dash) CEO Tony Xu’s letter to employees in November, which announced worker layoffs and indicated that the company would de-emphasize revenue:
“While our business continues to grow fast, given how quickly we hired, our operating expenses – if left unabated – would continue to outgrow our revenue,” Xu wrote.
Morton also cited several tweets from the CTO, co-founder, and the CEO of Uber. For instance, in a letter to employees last year, Uber CEO Dara Khosrowshahi wrote, “Now it’s about free cash flow. We can and should get there fast,” according to reporting by CNBC.
Still, neither company has achieved profitability to date. For instance: Uber reported a loss of around $270 on an EBITDA basis for the quarter ended Sept. 30. DoorDash: a loss of $190 million, according to Bloomberg, for the same time period.
Worse yet, amid the recent labor shortage, such firms have struggled to find workers. For instance, during the pandemic, Uber and Lyft (LYFT) lost over 60 percent of its drivers and today remain below pre-pandemic levels, according to reporting by Business Insider. Meanwhile, post-pandemic, Doordash has also reported difficulty finding “dashers” to deliver food
“DoorDash has done slightly better due to the fact that it’s less intimidating to pick up a bag of food than allow a stranger to get in your car,” Morton said.
During an economic slowdown, Morton said gig economy economy companies could see an increase in workers looking to supplement their incomes.
On the other hand, Morton noted that if the economy slows, it could derail the gig companies push towards profits. That’s because consumers might find themselves less likely to use services like Uber or DoorDash in hard times.
“It’s no secret that it’s more expensive to take an Uber across town from the East Village (In New York City) to the West Village versus a $3 L train,” said Morton. “Or what about picking up food versus having it delivered? If you’re talking about McDonald’s, our report shows an 80% price increase between picking it up in real life or ordering it from Uber or DoorDash.”
Still, Morton points out that in the past, similar services have proved resilient in the face of economic downturns. For instance, taxicab spending in 2008-2009 declined only slightly, according to a recent report by MoffettNathanson.
Simply put, gig era companies could still succeed in their quest to become profitable, even in the face of an uncertain economic outlook.
Dylan Croll is a reporter and researcher at Yahoo Finance. Follow him on Twitter at @CrollonPatrol.
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Read More: Gig companies are now obsessed with profits—not just revenue growth, says analyst.